![]() ![]() ![]() The stock price had gone from about $20 at the start of 2021 to more than $347 before the close of trading on Wednesday. Melvin Capital Management, the hedge fund in this case, had to start buying the same stock at a higher price because it had to cover its short. What started happening a few days ago is that the effort of Redditors to drive GameStop's stock price up began working, inching the price of the stock upward, and hedge funds got caught on the wrong side of their bet. (Of course, when a stock is being shorted or a short squeeze is occurring, the companies themselves, GameStop in particular, have nothing to do with the situation and are basically along for the ride). GameStop, a mall-based video game store suffering from both reduced foot traffic and the growth of online games during the pandemic, was seeing its stock decline due to these natural market conditions. Wants to Tunnel under Miamiīut one thing that hedge funds didn't hedge against in the GameStop case are thousands of small traders on Reddit who had noticed a number of stocks being shorted by hedge funds that had been essentially preying on troubled companies during a recession. If the short works out as planned, the hedge funds profit, but when it doesn't and the price of the stock goes up for some reason, the damage to the fund can be colossal. This can drive the market price of the stock down, and at that point the hedge funds would buy the stock back for less money, keeping the difference minus any fees paid to those who they've borrowed it from. ![]() The premise of shorting by hedge funds essentially involves the funds betting on a stock dropping in price in the long term, and making money by borrowing shares of stock for a fee and then selling these shares to buyers who could pay a lower price. GameStop had been trading at a fairly low price and was expected to drop further. In a nutshell, the GameStop short squeeze began when retail traders in a subreddit-not investment bankers but just people bored of the coronavirus lockdowns-got fed up with a hedge fund that was shorting GameStop stock. And at its core, it's not dissimilar with what Porsche had done a decade prior with Volkswagen stock. ![]()
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